Late-stage tech startups are facing a changing public market environment, but their early-stage counterparts are in a different world altogether. The cohort has had access to ample capital in recent quarters, giving them a bubble of venture capital that somewhat protects them from rapid changes in the greater economy.
While the bubble is not popping, it’s changing shape.
We may not see early-stage startups go through aggressive rounds of layoffs or experience rapid cuts to valuations due to shifting market conditions, but there’s a different signal worth tracking: pivots.
Pivots – a change in business strategy based on a new insight or market trend – are somewhat inevitable for young companies still chasing product-market fit. I’d argue that pivots are more important to track than fundraises, because they give a snapshot of a startup reacting to new tensions in the market.
Plus, unlike funding rounds, a pivot is a definite signal that something is changing, a tension other than a cadre of investors affirming that a founder is on to something big.
Following conversations with a number of investors and founders, it’s clear the coming weeks and months will include many subtle shifts in how early-stage startups do business. Some may re-prioritize objectives to reduce risk, while others may pursue new, more near-term business models to finally get some revenue in the door.
Pivot, pivot!
Pivots were popular even before the market changed. Everyone was pivoting to Clubhouse, and then everyone was pivoting to the metaverse. Now, everyone is pivoting to more sustainable revenue models.
Winnie, a startup that connects parents to childcare options, told TechCrunch this week that it is launching a new product: Winnie Pro. The service will help childcare centers grow and manage their businesses, not just fill empty seats.
Winnie Pro also means the company, which has investment money from Unusual Ventures, Homebrew, Day One Ventures, Reach Capital, and most recently Salesforce Ventures, has an expanded business model.
Previously, Winnie made money based on how many parents it sent to a childcare center, or the pay-per-lead model. The strategy worked well over the pandemic because Winnie experienced a surge in traffic, leading to 8x growth in revenue, CEO Sara Mauskopf says. The company is now evolving to a place where it wants to do more than just place “butts in seats.”
“Unlike subscription revenue, [pay-per-lead] varies every month based on how many parents you are trying to care for,” Mauskopf said. “One of the things we saw recently was that a lot of providers were limited by staffing challenges, so they were like, I can’t take any more leads right now.”
The company is now pursuing a SaaS-like model in which it charges a monthly fee, which ranges based on the capacity of the center, to help businesses with marketing, enrollments and even staffing. “Building in services that are always useful for your business are a way to also always deliver value to these providers, not just when they need seats,” Mauskopf added.
The pivoting business model feels like a natural evolution for the company, which can now give consultancy-like advice to centers based on the demand that it sees from parents. For example, Winnie could tell a business that parents in their geography are hungry for drop-in care and advise them to hire accordingly to service demand, and eventually increase revenue. Flywheels feel good, don’t they?
Going from a consumer marketplace to a B2B software model and a marketplace is one example of how startups are evolving during this time to be more ambitious and sticky when serving their customers.
Evergreen, evermore?
Pivots don’t just show up in startup strategy, but also in how early-stage investors plan to invest their money over the coming years. Emerging fund managers landed loads of capital, and attention, over the pandemic with the rise of solo GPs and the realization of the gains that could be made in venture capital.
Now, though, the group of investors, who either recently or will soon close their debut funds, are at the mercy of limited partners who may be losing some appetite given the state of the public markets. Older funds are already changing their ways to stay incentive-aligned.
Nearly a decade after its launch, early-stage venture firm Homebrew announced this week that it would leave the “strictly seed” stage of investing and pursue a stage-agnostic, capital-evergreen model. The firm is also going self-funded for its next fund, investing capital solely from general partners Hunter Walk and Satya Patel.
The shift is notable in a market where raising larger (and larger) funds has become routine. Of course, the perennial challenge that comes when raising more capital is that an investor then has more pressure to deliver on those funds. You may have been able to provide outcomes at a 5x rate on a $15 million fund, but can you still hit venture-like targets when you ask LPs to back a $150 million fund? What about $1.5 billion?
For investors, an evergreen fund alleviates the pressure a firm may feel to be in constant fundraising mode. It also allows investors to take their time. With the traditional venture capital model, the clock starts ticking when a fund is raised and it’s expected that investors will put the money to work in a relatively short amount of time, no matter the market conditions. Now, Homebrew has de-risked itself from LP commitments.
For startups, Homebrew’s pivoting strategy is good news, and perhaps more aligned with what cap tables look like today. Since Homebrew doesn’t need a specific percentage of ownership anymore, it’s more able to participate in myriad rounds, regardless of size. There are more options for a founder, yes, but with a different weight. Now Homebrew doesn’t need a big chunk of your company to give you advice.
“Counsel is sought independent of the size of the check written by an investor, and the best cap tables are diverse collections of operators, strategic capital and institutional dollars,” the firm said in a blog post announcing the change. “Whereas historically capital was the cost of having the ‘right’ or ‘authority’ to provide counsel, in today’s startup world, it’s clear that the two are often unconnected.”
If Homebrew’s decision has its intended outcome, other early-stage venture firms could follow its playbook and go cross-stage, less rigid and broader.
Late-stage problems are early-stage problems
Finally, startups serving other startups always serve as a useful temperature check on the macro environment of innovation. When startups selling to startups change up their own game, we can infer that the startup market is itself evolving.
Clearco, for example, is a fintech company that offers non-dilutive financing to e-commerce businesses. It was built in a time when capital was cheap and “growth at all costs” was the only way companies could keep up with pandemic demand. Add in the fact that it was explicitly serving e-commerce companies that needed loans, and you can see why there was a surge in interest in funding the company over the past few years.
It’s a similar story when it comes to Brex and Ramp, two businesses that help other businesses with spend management. Pipe, a Miami-based fintech, gives SaaS companies a way to get their revenue upfront — and it’s one of my favorite ways to track how confident investors are in the success of an entire vertical of business.
Back to Clearco. A year after rebranding from Clearbanc to Clearco, the fintech last week announced that co-founder Andrew D’Souza would be stepping back from his chief executive role. His co-founder and former romantic partner, Michele Romanow, is now at the helm of the business, which was most recently valued at $2 billion.
D’Souza’s departure is happening amid a changing market and perhaps even some pressure from its recent investors, SoftBank and Oak HC/FT. A number of growth-stage startups are reaching an inflection point where, as D’Souza says, they “have to start putting out forecasts and hitting those forecasts.” It’s not a pivot from a business sense; it’s a pivot in how decision-makers have influence at the company, and what goals to now prioritize.
For Clearco, prioritizing means shifting from solely offering capital to also offering liquidity. The company is working on a marketplace for Clearco-funded businesses to sell services, or their entire startup, to each other. The move was driven by investors being more concerned about the company’s capital efficiency, past profitability and unit economics, D’Souza said in a previous interview.
“We’re moving into a time where you have to balance capital efficiency and growth,” D’Souza told TechCrunch. For early-stage startups, Clearco’s shift in strategy should signal that long-term growth can’t be entirely rooted to the ability to raise the next check.
The subtlety of becoming a more sustainable company will be a common dynamic in the early stage over the next few quarters. Sure, there may be a decline in valuations and investor interest, but more importantly, the concept of pivoting — and not just digging deeper and wider — will get a refreshing rebrand.
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